Meaning of Lock In Period

What is lock in period in mutual funds?: The term “lock in period” describes when an investment or the money deposited cannot be sold, reclaimed, or withdrawn. A fund’s or investment’s lock in term is not the same as its investment duration. The investment duration may exceed the lock-in term. In private equity IPOs, hedge funds, certain mutual funds, etc., lock in periods are typical. Ideally, traders shouldn’t hold off on making withdrawals until the end of the lock-in period. After the lock-in period, they should assess the fund’s effectiveness and select whether to keep the monies invested or do the redemption.

Meaning of lock-in period for various investment forms

There are various meanings that can be attributed to lock-in period in terms of different investment forms.

During the mutual fund lock-in period, the shareholder is not permitted to completely or in part do withdrawal or redemption of the deposited money or the assigned units. Closed funds are mutual funds having a lock-in period. Equity-linked saving scheme mutual funds (“ELSS”) are one of the famous closed funds. There is a 3-year lock-in period that is applicable to ELSS mutual funds.

Hedge Funds are some of the other famous closed funds havin a lock in period. The lock-in period for hedge funds is typically 30 to 90 days. This offers the hedge fund management ample time to progressively remove the assets without negatively impacting the portfolios.

Fixed deposits that save on taxes have a five-year lock-in term. Before the fixed period, the shareholder isn’t really permitted to take out money.

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Indian government also releases bonds at regular intervals.  The lock-in term for such Governmental Bonds is 6 years.

Unit Linked Insurance Plans, or ULIPs, integrate investing and insurance into a single fund structure. They have a 5-year compulsory lock-in period as standard.

Importance of Lock-In Period

Lock-in periods serve as rigid investment plans for the people who like to invest. Due to little market turmoil, many novice investors frequently pull out their money in fear. A lock-in period preserves the assets for a certain amount of time and allows the investor the chance to make profitable investments in the longer term.

A lock-in period teaches investors about the advantages of investing in the longer term. They can adhere to the plan thanks to a lock-in period, which also demonstrates how having money invested for an extended length of time may be lucrative.

A lock-in period enables investors to capitalize on long-term capital gains and favorable tax treatment as well. Apart from this, there are some other benefits of having a lock-in period as well. Managers of hedge funds are given enough time to withdraw from an investment. Withdrawals from hedge funds that are excessively abrupt or recurrent throw off the balance of the entire portfolio.

In the context of initial public offerings (IPOs), the lock-in period permits the listed firm to utilize the money acquired and establish a solid market footing. Additionally, it protects the investor from the post-IPO values’ severe fluctuation.

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Mutual fund lock-in periods are essential because they promote fund durability. Increased redemption due to excessive selling of funds causes liquidity problems. A lock-in period aids in maintaining the mutual fund’s stability.

What is Lock-In Period in Mutual Funds?

A mutual fund’s lock-in period maintains the fund’s equilibrium, stability, and liquidity. Additionally, it offers investors the chance to expand their capital and reap the rewards of investment in the longer term.

Equity Funds:

Only one equity mutual fund, called Equity Linked Savings Scheme (ELSS), has a lock-in period. The lock-in period for these mutual funds is three years. Under Section 80C of the Income Tax Act, investments made in ELSS plans are entitled to a tax deduction of up to Rs 1.5 lakh per year.

ELSS funds make equity investments. Simply put, they are multi-cap funds with diverse portfolios run by knowledgeable fund managers. For the services, the fund manager imposes a fee. Open-ended equity funds have an exit load even if there is no lock-in period. The fund house imposes an exit load if you withdraw from the fund within a year’s time.

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A lock-in time will impact the liquidity of the investment. In other sense, throughout the lock-in period, the investments are inaccessible. You won’t be allowed to leave the scheme early. Holding onto one’s investments till the lock-in period is ended is thus required.

The profits made from an ELSS arrangement are taxed, nevertheless. The gains are considered short-term capital gains and thus are subject to a 15% tax if held for less than a year. While earnings on investments kept for longer than a year are referred to as long-term capital gains and are taxable at a rate of 10% for profits above Rs 1 lakh.

There is no lock-in period for debt and hybrid mutual funds, so an investor can do withdrawal or redemption of the money at any point.

What can one do after following the Lock-In Period?

At the conclusion of the lock-in period, an investor shouldn’t do withdrawal of money right away. Therefore, one should give the fund’s performance some thought before deciding whether to withdraw the money or keep investing.

ELSS funds have a 3-year lock-in period, investors must spend 5–6 years to assess the fund’s profitability since ELSS fund investments take time to accrue and a 3-year window is insufficient to assess the fund’s success. The investor can keep investing in the fund as long as it is expanding and meets its financial objectives. It is best to sell this investment and put the money into a new ELSS fund if the fund’s performance does not meet the individual’s objectives.

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Nevertheless, investor can sell their investments in order to cover their prompt financial demands in the event of a major crunch.

Conclusion

You may not sell investments during a lockup period. Additionally, it offers investors the chance to increase their capital. The duration of an investment is not determined by a lock-in period. It is only a limitation imposed by the AMC or corporation to protect market stability and liquidity.

After the lock-in period expires, investors are not required to redeem their investments from ELSS funds. But when the lock-in time expires, it’s important to keep an eye on an investment. Only if a fund is really not functioning as expected by the investors may they sell their investments. or when they want money for a sudden requirement. Investors who want to invest in a new ELSS fund after the lock-in to reduce taxes shouldn’t do redemption of their current assets.

Author

Prashant Raut is a successful professional stock market trader. He is an expert in understanding and analyzing technical charts. With his 8 years of experience and expertise, he delivers webinars on stock market concepts. He also bags the ‘Golden Book of World Record’ for having the highest number of people attending his webinar on share trading.